Joakim Reiter: Global Trade and Payments Grow Together

Experts have noticed recently that global trade is not growing. An I.M.F. study calculated that a 1 percent increase in global growth increased trade volumes by 2.5 percent in the 1990s, while in recent years, the same growth has increased trade by just 0.7 percent.

Ripple Insights was privileged to discuss what this shift means with Joakim Reiter, Deputy Secretary-General of the United Nations Conference on Trade and Development.

Ripple Insights: Your point of view on this slowing in global trade includes an often-overlooked segment of the economy: low-value payments commonly exchanged between individuals in a way that undercuts the measurement of traditional global trade. Can you tell us more about your theory?

Deputy Secretary-General Joakim Reiter: Since the financial crisis, the world has seen its slowest period of trade growth since the second world war. That’s bad news, because trade is an engine for growth and jobs. Trade provides better jobs and destroys older jobs. Because of those benefits, this trend is disturbing and worrisome, particularly in the developing world. So, why is this decline happening? Part of it is an overall slowdown in the economy. Part of it is a technology story. Digital technology underpinning payments and shipping and distribution are transforming global trade.

New corporates like Amazon, Alibaba, and eBay are changing the bulk of trade from large container trade to small parcel trade. This is a big shift, and our systems are not built for small parcel trade. Right now, shipping is optimized for shipping container trade, just as payments systems are optimized for high-value, low-volume payments. Individuals and small corporates are finding out how difficult cross-border business really is, especially when the system isn’t set up for them.

RI: With this increase in high-volume, low-value payments and the increased pressure on corporates to adjust to extreme transaction processing, what does this mean for the future of finance in Europe and the greater world?

JR: Think of trade as a complex, precise machine. Payments are the lubricant to that machine. It allows the pieces to move in close proximity to one another and keep moving. The machine is changing, and when the machine changes, the lube changes.

Bottom line: all actors in rich and poor countries must figure out how to offer their clients a faster, scalable way to trade and be paid for goods and services. Today’s systems cannot keep up, and declines like the one we’re seeing in global trade are the early symptoms of a growing problem.

Right now, the machine is slowing down. Much of what happens through digitally-enabled trade is hampered by slower payments, and the payment is the key thing. Trade works best when there’s a payment system aligned to it. The challenge is that alignment.

We’ve seen examples like PayPal, where payments services evolved in combination with e-commerce. We’ve also seen the development of unbanked citizens as economic actors without intermediaries. These are people who effectively exist outside of the global financial system. How do we solve that, and include more people in the global financial system?

Technology offers some solution. Mobile phones provided financial inclusion faster than any policy could keep pace, triggering changes that nothing else could have. For example, look at the mobile banking platform called M-Pesa from Vodafone. M-Pesa launched in 2007 to facilitate phone-based money transfers, as well as carry out basic financing services in Kenya. M-Pesa is bigger than banks in Kenya, serving 17 million accounts in that country alone. It’s caught on in several other countries, like Afghanistan and South Africa, but it takes a specific infrastructure for that model to make sense. For a telecom to essentially step in and act as a branchless banking service requires regulatory allowance and a relatively weak banking network. However, in this case, technology has had a huge positive impact. Commerce exists no matter what. M-Pesa seized on an opportunity that banks could not meet. Market needs will be met, whether banks are there or not. Technology can certainly help, from within banks as well as without.

As trade and payments are democratized, more people can participate in both spheres. Nobody wants to be financially disenfranchised, everybody wants to be included. The demand has been there. Technological tools have just now arrived at the place where that’s really possible. Today, there are more mobile phones than toilets in the the world. Technology can reduce entry cost and tap needs that has existed for a long time. It’s revolution from the bottom up. Technology allows the individual in developing companies to enjoy the powers traditionally granted to the rich and to corporates.

Mobile payments are bigger today in Kenya than they are in Germany. That’s economy leapfrogging, assisted by technology. If you had asked a developmental economist fifteen years ago, nobody would have predicted that. Each country and each market will find their own way toward a more democratized trade system, which in turn will require a similar payments system. In many places, that is a change that will come through banks with strong regulation, while in others technology will have an emancipating effect.

Joakim Reiter is the Deputy Secretary-General of the United Nations Conference on Trade and Development. This interview is part of our series on leaders in our industry. For more like this, please subscribe to Ripple Insights.